By John Bostwick, Head of Content Management
Leaders from the G7 countries concluded their annual three-day summit in Biarritz, France yesterday. One of the most closely followed storylines of the event involved French President Emmanuel Macron and U.S. President Donald Trump.
This year, France held the G7 presidency, which rotates annually between the member countries of Canada, France, Germany, Italy, Japan, the U.K and the U.S. As summit host, President Macron decided to overhaul the summit’s format to emphasise transparency and open-door meetings. He also did away with the traditional publishing of a final communique, which he said would be “pointless” in light of longstanding disagreements between member countries on issues such as climate change. (At last year’s summit, President Trump refused to endorse the final communique and didn’t attend any climate change meetings.) Finally, Macron’s summit agenda was broadly designed to “[tackle] the roots of inequality,” in part by promoting African development and gender equality.
In short, Macron was both acknowledging the fact that the U.S. and France (not to mention the other G7 countries) are too far apart on certain issues to reasonably expect publishing a substantive document after three days. At the same time, he wanted to direct the summit conversation, and his agenda clearly reflected his values, which are often at odds with those of the White House.
U.S. officials responded to Macron’s agenda with what The New York Times calls an “orchestrated message,” some of it delivered anonymously. Trump’s administration accused Macron of ignoring U.S. calls to focus the summit on “national security and a looming economic slowdown” in favour of “niche” issues that appealed to Macron’s political base.
In an unusual gambit, Macron invited Trump to an unscheduled lunch shortly after Trump touched down in France. According to The Wall Street Journal, President Macron “used the lunch to explain his position on contentious issues, such as global trade tensions, France’s … digital services [tax] and his push to de-escalate tensions between the U.S. and Iran,” along with the ongoing fires that are damaging the Amazon.
The two leaders have been particularly at odds over France’s digital services tax, or DST. The French DST was passed in July and is effective retroactive to January 1 of this year. It was unilaterally implemented by France at a time when OECD countries are struggling achieve a consensus on how to effectively and fairly tax the digital economy.
Looked at one way, France’s DST seeks to address the major issue of this year’s G7 summit — inequality. The DST holds large tech companies like Amazon and Google accountable for paying taxes to French authorities for revenues generated in France. Traditionally, those companies pay taxes only to the low-tax jurisdictions (such as Ireland and Luxembourg) where they’re based. According to Reuters, this isn’t just a tax issue for Macron, who “says taxing big tech more is a matter of social justice.”
France’s DST imposes a 3 percent tax on revenue (not profits) generated from digital services. It only applies to companies with annual revenues of more than 750 million euros worldwide and more than 25 million euros in France. It should be said that France is not alone among EU countries in taking such action, and that “Britain, Spain, Italy and Austria have also announced plans for their own digital levies.” (An EU-wide DST is unlikely at this point, since jurisdictions with low corporate taxes that attract large multinationals have a major interest in maintaining the status quo.)
While French officials have maintained that the country’s DST does not specifically target U.S. companies, the law’s revenue thresholds are currently met by only 30 companies, most of which are American. Not surprisingly, many U.S. tech companies believe they are being unfairly targeted, and the U.S. administration agrees. Shortly after the French law was passed in July, Trump responded by Twitter, writing: “France just put a digital tax on our great American technology companies. If anybody taxes them, it should be their home Country, the USA. We will announce a substantial reciprocal action on Macron’s foolishness shortly. I’ve always said American wine is better than French wine!”
Trump’s tweet wasn’t the first time he’d threatened to retaliate against France by targeting its most famous export: wine. In November 2018, he attacked Macron through the usual medium, tweeting: “On Trade, France makes excellent wine, but so does the U.S. The problem is that France makes it very hard for the U.S. to sell its wines into France, and charges big Tariffs, whereas the U.S. makes it easy for French wines, and charges very small Tariffs. Not fair, must change!”
There’s some humour in this, not least because in the above two tweets, Trump — who doesn’t drink alcohol — is rendering judgement on the quality of French and American wines. When pressed to explain why he prefers American wines to French ones, he responded, “I just like the way they look.”
Humour aside, Trump’s threats of a trade war involving wine have been taken seriously inside France. The Guardian explains that wine is France’s second most valuable export (after aerospace exports) and that the U.S. is its biggest market. French producers of modestly-priced wines would be particularly vulnerable to U.S. tariffs. One such producer told the Guardian that in response to Trump’s comments he’s diversifying into new Asian markets and that his U.S. importer has increased orders. “I’m worried,” he said.
Fortunately for French wine producers and U.S. consumers, Trump and Macron appear to have come to an agreement over France’s new DST, which may avert the tariffs. Reuters reported yesterday that French Finance Minister Bruno Le Maire reached a compromise with U.S. Treasury Secretary Steven Mnuchin and White House economic adviser Larry Kudlow. In the agreement, “France would repay to companies the difference between a French tax and a planned mechanism being drawn up by the OECD.”
Later in the day, Trump and Macron held a joint press conference announcing the agreement. The Hill reports that at the conference, Macron vowed France would scrap its national digital tax when an international digital tax is established. In that event, he clarified, “companies that have paid the French DST ‘will be reimbursed.’” He added: “The idea is that we need to find a joint agreement in order to address joint international problems. … the international tax system definitely needs to be modernized, and I think we will work together in a spirit of cooperation on this.”
For the moment, then, the G7 summit storyline involving France and the U.S., digital taxation and wine tariffs appears to have a happy ending. It also illuminates some of the most important economic issues of our time. Perhaps most important, it shows how elected leaders and their economic designees continue to grapple with the complex issue of how to effectively and fairly tax digital services in a globally connected world. Given the amount of money involved — and the tax revenues that could be generated in countries throughout the world under a new paradigm — the importance of solving this complex problem can’t be overstated.
At the same time, the Trump-Macron storyline at the G7 summit makes clear that many of the forces shaping the global economy haven’t changed much. Some leaders, for example, are still using the centuries-old strategy of imposing or threatening tariffs to protect national interests. (And in that light it seems fitting that Trump’s target in this case was wine, a product that’s been traded across borders for centuries, if not millennia.) Trump’s wine-tariff threat may strike some as anachronistic in the context of taxing tech behemoths in 2019, but it certainly got Macron’s (and his country’s) attention.
Along these lines, the Trump-Macron story also reveals how much of our global economy can still be shaped by the decisions (or whims) of a select few leaders. A dashed-off tweet threatening tariffs can throw an entire industry into concern, if not panic. And an unscheduled lunch between two presidents can, perhaps, help facilitate an agreement that may in turn hasten the development of international tax legislation that’s fit for the digital age.